National or Regional Currency: Pakistani Rupee, PKR
Population: 174,578,558 (July 2009 est.)
Area: total: 796,095 sq km
Status: 27th largest economy in the world in terms of purchasing power, and the 45th largest in absolute dollar terms.

Sunday, January 2, 2011

Hyperinflation fears grow

ISLAMABAD (December 30, 2010) : A leading economist fears that if the government fails to implement the Reformed General Sales Tax (RGST) and levy agriculture income tax, hyperinflation would grip the country and the authorities would be left with no option but to print currency notes in hundreds of billions.

Hinting at a strong possibility of an increase in inflation in coming days, former member of the Economic Advisory Council of present government and renowned economist Dr Hafeez Pasha portrayed a horrifying picture of the economy before the evening session of the 26th annual general meeting of Pakistan Institute of Development Economics (PIDE).

He said deficit would be out of control, forcing the government to print notes to the tune of around Rs 1 trillion. The country is going to witness an unprecedented budget deficit of over Rs 1.2 trillion during the on-going fiscal year and to meet this deficit government would be required to print Rs 1 trillion currency notes against Rs 600 billion printed in 2008 in this regard.

He said the country is going to face historic inflation in case the government is unable to take taxation measures to generate additional revenue. People are talking about the inflationary impact of the RGST, but they are unaware that a time will come when government has to print notes worth Rs 1 trillion. The inflation caused by the printing of new notes would be so high that the people would forget about the inflationary impact of the RGST.

Dr Pasha said the deficit is rising day by day and delay in the introduction of new taxation measure would result in extraordinary high inflation. The country would be in grip of hyperinflation, which would be unstoppable. The inflationary impact due to printing of new notes would be much higher than the RGST. Talking about inflation, he hinted that inflation would further increase in coming days unless government would take timely steps to control the situation.

He said economic managers have failed to foresee impact of revenue generation, inflationary impact of RGST, and also were not able to take on board all the stakeholders on the issue. Under the current circumstances, the provinces have to enforce the agricultural income tax and the government should restore wealth tax. The provinces should have taken appropriate steps one year ago and nobody was stopping the federal government from taking measures to generate revenue.

He said the government must show sense of responsibility to avoid printing of notes in coming days. It is unfortunate that the people have not been educated about the actual impact of the RGST. Resultantly, public is unaware of the actual impact.

He said I am very much worried about the constant delay in the implementation of the RGST. It is unfortunate that at first government talked about the RGST implementation in October, which was delayed to December. Now there is a political turmoil on the issue. Even at technical level there is still no unanimity or consensus on all the issues pertaining to RGST.

Referring to a report on the inflationary impact of the RGST, Dr Pasha said the FBR had asked the PIDE to compile a report on the inflationary impact of the RGST, but so far the report has not been completed. There is a lack of clarity on the issue of the RGST and we have not done a good job for taking this reform forward.

In the morning session, Dr Pasha said that we cannot give a specific date to the IMF for the implementation of the RGST keeping in view current situation. India has been struggling for the last 15 years to properly enforce the VAT, but it is unable to do so. Contrary to this, in Pakistan the sales tax reforms have just been started for the last one year. The IMF should have to be patient as we cannot give a specific date for the implementation of the RGST. We have to respect our Parliament and it is not possible to give a precise date for the introduction of the RGST.

He added that the Sales Tax Act of 1990 has all features of the Value Added Tax (VAT). The concept of sales tax domestic zero-rating was made part of the RGST, which has not been done anywhere in the world. He said there is a need for rationalisation of RGST by which he means that only integrated implementation could be viable and sustainable.

About distribution, he said that all the collection of the RGST should go to the divisible pool from where it should be distributed according to National Finance Commission (NFC) formula among the provinces. International VAT expert Ehtisham Ahmad said the RGST is not a new tax. It has never been considered as a new tax. The problems in the GST of 1990 would now be fixed through the RGST. The performance of the existing sales tax has been continuously declining having impact on tax to GDP ratio.

He said during Musharraf tenure measures were taken at the import stage to improve the trade position of the country, which had impacted the tax to GDP ratio. It was a deliberate attempt to improve the trade position of the country.